Working Papers
The pass-through of corporate tax cuts to consumer loans: Evidence from the TCJA, with Joao Granja and Arndt Weinrich,
Using data from TransUnion, a large U.S. credit bureau, we analyze whether and how cuts in bank income taxation are passed through to the interest rates and size of consumer loans. Exploiting the change in bank corporate income taxation from the Tax Cuts and Jobs Act and utilizing tax-exempt credit unions as a control group, we find that corporate tax cuts lead to lower interest rates for consumers obtaining auto loans from banks. We also find greater pass-through for individuals with higher credit quality. We develop a parsimonious model to identify the economic mechanisms influencing the pass-through of corporate tax cuts to interest rates. Our empirical tests reveal that pass-through declines with banks' market power and leverage, while we find only a limited role for selection in consumer credit markets.
R&R at Journal of Finance
Bankruptcy insures consumers against large and unexpected wealth shocks. However, debtors may abuse this insurance. Indeed, close to 20% of consumer bankruptcy filings contain at least one material misstatement. I exploit the conditionally random assignment of audits to estimate the effect of mandatory audits on debt forgiveness in consumer bankruptcy. I find that audits reduce debt forgiveness, but only when alternative oversight is low (Chapter 7). Audits come at the cost of increased case complexity for filers, deteriorating the long-run financial health of unsophisticated filers. Generally, audits drive a reallocation of debt relief from non-compliers and misreporters to truthful filers. Aggregate calculations show that the reduction in debt forgiveness due to misstatements and deterrence exceeds the direct cost of increasing the audit rate when oversight is low. Reductions in debt relief due to deterrence exceed reductions due to identified misstatements twofold.
Current Expected Credit Losses and Consumer Loans, with Joao Granja,
Accepted at Journal of Accounting & Economics
We use data from TransUnion, a large U.S. credit bureau covering millions of individual consumer loans, to examine the transition to the Current Expected Credit Loss (CECL) accounting standard and to provide novel evidence about the impact that raising reserve requirements has on banks' pricing and lending decisions in the U.S. consumer lending market. We find that greater reserve requirements following the adoption of CECL induce a statistically significant but economically moderate increase in loan interest rates. The effects are more pronounced for weakly-capitalized banks and even more so for underprivileged individuals borrowing from weakly-capitalized banks. Our evidence informs the ongoing policy debate between standard setters and members of the financial industry about the potential effects of CECL on credit markets.
Data and Welfare in Credit Markets, with Mark Jansen, Constantine Yannelis, and Anthony Lee Zhang,
R&R at Journal of Financial Economics
We show how to measure the welfare effects arising from increased data availability. When lenders have more data on prospective borrower costs, they can charge prices that are more aligned with these costs. This increases total social welfare and transfers surplus across borrower types. We show that under certain assumptions the magnitudes of these welfare changes can be estimated using only quantity and price data. Applying our methodology to bankruptcy flag removal, we find that in a counterfactual world where bankruptcy flags are never removed from credit reports, previously-bankrupt borrowers’ surplus decreases substantially, whereas efficiency increases only modestly. We show how the framework can be extended to incorporate adverse selection and imperfect competition.